Empresas Copec SA
SGO:COPEC
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Good day, everyone, and welcome to Empresas Copec's 4Q '17 Results Conference Call. Today's presentation and the 4Q '17 earnings release are available on the company's website at www.empresascopec.cl and also on our Investor Relations website, investor.empresascopec.cl.
Before we begin, I would like to remind you that this presentation may include market outlooks and forward-looking statements, which are based on the beliefs and assumptions of Empresas Copec's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Empresas Copec, and could cause results to differ materially from those expressed in such forward-looking statements. This presentation contains certain performance measures that have been adjusted with respect to IFRS definitions, such as EBITDA.
I will now turn the conference call over to Mr. Rodrigo Huidobro, Chief Financial Officer of Empresas Copec. Please go ahead, sir.
Thank you very much. Thank you, everyone, for joining us today in this conference call where we'll be taking a look at the final results of the year 2017 and particularly at the fourth quarter results. I'm joined here today by people from our Investor Relations Department. José Pablo Carvallo and Cristián Palacios. And also people from Arauco, Gianfranco Truffello, Marcelo Bennett and María José Ulloa, all of whom will be helping us out with any questions, specific questions you might have regarding the forestry sector.
Let me start by moving on to Page 4, where we place the results of this quarter in a historical context. You can see in those charts that EBITDA amounted to $529 million, which compares favorably with the quarter, which is exactly comparable, which is the fourth quarter 2016. Let me just remind you that there are strong seasonalities in part of our business lines here, specifically in the fuels sector. Therefore, probably a better way to compare the performance of the fuels sector is with regard to the fourth quarter 2016. However, with respect to the immediately preceding quarter, third quarter of 2017, we have recorded a decrease with respect to the $639 million, which were recorded in the third quarter 2017.
In terms of net income, we have reached $106 million. This is a figure that is below both the fourth quarter 2016 and the third quarter 2017 and is basically influenced by several onetime effects that are listed in the slide there, which have to do basically with impairments. We have recorded impairments at Arauco, also at our fishing division, Orizon, and Sonamar, which is a related company that basically transports fuels by sea, has a fleet of vessels that transport fuels by sea. There's also a financial effect related to the refinancing operation that Arauco carried through in the last part of the year, so there was a repurchase of bonds at Arauco. There was also onetime adjustment in terms of the revaluation of biological assets. We'll get back to that. And all of this onetime negative effects are offset to a certain degree by one positive effect, which has to do with the effect of the tax reforms that have been announced in the U.S.A. and in Argentina, and which affect our deferred tax liabilities and, therefore, imply a positive net income effect. So as I said, our net income, which is characterized by several one-offs, several onetime effects that have brought it down to this $106 million.
Just a brief word on our yearly EBITDA, which came up to $2.22 billion and is the highest EBITDA on record so far. So overall, a good year in relation to past years in terms of EBITDA.
Moving on to Page 5. We are showing there the main variations regarding net income with respect to the fourth quarter 2016. You can see to the left-hand side that the increases come basically from Copec and Arauco. But there are strong negative effects in our fishing division, Igemar, which as I said, relate to a onetime impairment that we have gone ahead with. And there's also an effect related to the really high comparison base that we had in the fourth quarter of last year, where one of our subsidiary, AGESA, recorded net income stemming from the sale of GNL Q. This is the LNG terminal of which we used to own 20% -- a 20% stake through this related company, AGESA. That was sold back in the fourth quarter 2016 and gave way to a final profit for Empresas Copec, which amounted to approximately $50 million. So that very high base also explains part of the variation with regard to the last quarter of 2016. In terms of the composition of net income, and as always, you can see that most of our net income comes from our forestry and fuels division.
When going to Page 6 and doing the same analysis for EBITDA, you can see that EBITDA on a year-to-year basis for the quarter increased by 30%. Improvement come from Arauco and Copec basically. In the case of Arauco, it has to do with better pricing conditions in all business lines basically, but particularly pulp. In the case of the fuels business, it has to do with better margins stemming in part from nonrecurrent effects, such as the FIFO, but also a general improvement in [indiscernible]. So we'll come to that later.
Moving on to Page 7. We are showing the income statement there. Once again, we came up with a -- to a net income of $106 million compared to a net income of $132 million for the fourth quarter 2016. But on operational level, we are seeing a stronger result in Arauco basically due to higher revenue in all business lines, as I said, particularly influenced by the very high prices of pulp that we have seen in the last part of the year. In the fuels sector, we have seen better results in Copec particularly. This has been caused by higher sales volume in Chile, in Colombia and also some effect coming from the inventory reevaluation, which we call the FIFO effect, that has been positive in this -- during this quarter. All of this has been partially offset by a decrease in operational results in Abastible, basically as a result of a lower performance in our subsidiary in Colombia. More detail on that to follow.
In terms of lower -- of nonoperating income, we have recorded a decrease, and this has to do with, as we anticipated before, it has to do, first of all, with impairments, which have taken place at our fishing subsidiary, at Arauco and also in our related company, Sonamar, all of which amount to approximately $115 million and most of which are concentrated in our fishing division. So it's Igemar through its affiliate company, Orizon, that has a -- where the bulk of these impairment is concentrated. Together with that, we are seeing a drop in other income, which has to do with an adjustment made -- it's a onetime adjustment made on the revaluation of biological assets, which amounts approximately to $54 million and it has to do with a re-estimation of the stock of plantations at Arauco, onetime effect which has to do with the re-estimation of the stock of plantations basically. That's -- the bulk of the adjustment has to do with this onetime effect on the stock of plantations.
There's also a higher financial expense, which is related to this refinancing that Arauco went ahead with in the last part of the year. The repurchase of a bond was carried out at market value, which was higher than book value and, therefore, gave way to this loss of approximately $65 million. In exchange for that, of course, Arauco has secured lower rates, has extended its tenures and also has eliminated its financing risk to a great extent.
All of these negative effects are offset to some extent by the positive tax effect. It's an effect of -- on deferred tax liabilities basically, which come from the announced and approved tax reforms in both the U.S.A. and Argentina. In the case of the U.S., corporate tax is gradually falling from 35% to 21%, as I understand. And in the case of Argentina, the drop will be from 35% to 25% on a gradual basis.
Moving to Page 8. We're showing our most important financial ratios there. Return on capital employed has been gradually increasing and related basically to the performance of our forestry division. EBITDA margin has decreased with respect to immediately preceding quarter, and that has to do with a lower margin at the forestry division, we'll go into that later, and also a lower margin in fuels, a lower percent to our margin in fuels, which has to do basically with the increase in oil prices. Let me remind you that we have very stable margins, which are measured in pesos. And these are stable commercial margins, which are now a percent fully now measured on a basis of high revenues related to oil prices going up. So this composition effect also makes the EBITDA margin move down.
In terms of indebtedness, we have gradually moved down from 3x net debt to EBITDA at the beginning of the year to our ending figure of 2.3x EBITDA. It has to do with an increased EBITDA on one side, but also with the prepayment and the lowering of our debt levels.
Moving on to the analysis by business divisions. We're starting out on Page 11 with our forestry division. Arauco has reported a net income for the quarter of $83 million compared to $74 million for the equivalent quarter of 2016. EBITDA is up to $350 million from a starting point of $271 million for the fourth quarter 2016. Operating income has increased, and that has to do with revenues, which go up basically in all business lines and mainly, as you well know, in the wood pulp business and in relation to increasing prices. We also have recorded higher sales volumes for panels.
In terms of nonoperating income, as we have already commented, there's a drop in other income related to this onetime adjustment on revaluation of biological assets on plantations, the higher financial expense related to the repurchase of outstanding bonds, and the increase in other expenses related to this onetime or nonrecurrent impairments that we have gone ahead with, both at a fixed-asset level and also at a goodwill level. All of this partially offset by effects of the tax reform in the U.S. and Argentina.
On Page 12, we're giving some more flavor on the pulp division. There's a strong increase in EBITDA on a year-to-year basis. This quarter, we recorded an EBITDA of $254 million compared to $146 million in the fourth quarter 2016. This has to do with prices going up 30% basically on average during the quarter with respect to the equivalent quarter last year. And in spite of sales volumes going down, we have recorded this significant increase in EBITDA stemming from the prices. In relation to costs, we have recorded a decrease, both in short fiber and long fiber, and some increase in unbleached long fiber.
With respect to the immediately preceding quarter, there's a drop in EBITDA. There's -- excuse me, there's stability in EBITDA $251 million to $254 million, and this has to do with the composition of 2 effects: one is prices going down -- prices going up by 11%; but at the same time, we had sales volumes going down by 12%. And this, in turn, has to do with the maintenance stoppages, that are shown there, that were a little longer than usual. And together with that, we had one -- some nonrecurrent events, especially at the Constitución mill, where there was a blockade going on for some time, which prevented or lowered down our production. So a drop in volume basically, coupled with an increase in prices. All in all, EBITDA coming from the pulp division has remained very stable.
Moving on to Page 13. There's a general outlook for the pulp segment discussed there. As you well know, we have seen strength in pulp worldwide. We are seeing basically every single market with strong performance over the last few months. The years to follow as well look quite tight in terms of the balance between supply and demand, basically because no new projects have been announced, and no projects are now under construction. There is some new capacity still ramping up from a couple of projects around the world. But after those are finished, no new capacity announced for several years. There's a leap time of several years and, therefore, no new capacity entering the market for a few years.
Demand has been strong. Healthy economies. Paper producers being able to pass through prices to the final customers. Environmental restrictions in China, which have favored imports over other sources of paper and, therefore, boosted demand for pulp. All of that has helped in terms of boosting demand worldwide and, therefore, keeping prices stable at the very high levels that we're now seeing. Europe and North America also saw in good conditions in terms of pricing. As you see in the graph in the bottom-left corner there, prices have remained quite stable in China for the last 3 months at levels of $790 for short fiber and $890 for long fiber.
In terms of inventories, which are shown on Page 14, we are also seeing stability with levels, which are very close to historical averages, 31 days in the case of softwood and 40 days in the case of hardwood. Demand for the year 2017 increased by 3.3% overall, with all regions in general showing interesting growth and China, in particular, showing a 6.3% increase.
In our wood division, which we're discussing on Page 15, we have seen an EBITDA, which is stable with respect to the fourth quarter of 2016 and which goes down with respect to the third quarter 2017. With respect to the immediately preceding quarter, we have basically seen a drop in sales volumes for sawn timber. Once again, part of this has to do with onetime events that have hurt our capacity to sell. And therefore, these reduced volumes have basically caused a drop in EBITDA from one quarter to another, 8% reduction in the case of sawn timber and 3.6% reduction in case of the volume for panels.
Regarding the outlook for these products. On Page 16, we're showing some developments in the North American market. You can see that housing starts have gone up to 1.3 million units per year as of January, which is the maximum level recorded in the last 12 months. If you look at the graph, at the long-term graph that we're showing down there, you could still think that there might be some room for additional increase. So strong recovery, gradual but strong from the years following the stock [ price ] crisis and potentially more growth to come in the North American market.
In terms of the different product lines, in general, we're seeing stable demand. We have seen stable inventories. Some competition from other countries in some particular products, like remanufacturing products. But overall, very good conditions for demand and, therefore, good conditions for pricing.
Moving on to our other most important markets for wood products on Page 17. We're showing a discussion there on South America, Asia and Europe basically. In South America, we have seen some improvements in Brazil. This is a market that has been lagging in terms of growth for some time and weak in terms of growth and margins. We have seen some improvements in terms of consumption, some improvements in terms of sales and prices. Still a question mark on a potential effect of some eventual new capacity to come in, in the later part of the year. Argentina has shown stability. Good results in general, improving construction, all of which has led to a better environment for pricing and, therefore, better results. Chile, in general, with improvements in demand and, therefore, room for higher prices and a good outlook in general for 2018. Stability in Asia in general and also stability in Europe with some room for further price increases. So all in all, we have a moderate optimism for the wood division in terms of the behavior of its main markets around the world.
Moving on to our fuels division and the detail for the net income on Page 19. We're showing the net income of Copec, our Chilean fuels division. This is Copec at a consolidated level, which means that it includes Terpel and also includes Mapco or subsidiary in the U.S. This is all in million Chilean pesos, which makes sense given this is a very stable -- this is a business where the functional currency is basically the local currency. That's why we like to show the results in Chilean pesos in this case.
EBITDA has gone up from CLP 62,000 million to CLP 86,000 million, so a very interesting increase with respect to the fourth quarter 2016. Net income also goes up from CLP 19,000 million to CLP 32,000 million. In operational terms, the improvement has to do with greater volumes. We've seen a very interesting environment of growth in Chile, both in the industrial channel and in gas stations. We'll come back to that.
We have also seen higher volumes in Terpel. We have seen increased margins in Chile, which had to do with commercial reasons, but also and very importantly, with the FIFO effect, which as you know, is a nonrecurrent or an effect that places some volatility on our fuels margins. Overall during the year, we have seen oil prices increases and that, in general, means that we have -- we record a positive 5.8. So that has undoubtedly helped our margins in Chile. Together with that, we have continued to record margins stemming from import operations, which are also hard to predict and which also lent some volatilities to our results in the fuels division because they depend on the day-to-day, basically, conditions of the market. And I would also like to mention an improvement in the lubricants division, which has done very well, especially in relation to last year.
Finally in terms of operations, we have recorded the consolidation of Mapco in the whole quarter, which compares with only 1 month that was recorded in the fourth quarter last year for Mapco. So part of the increase is also related to that Mapco consolidation.
With respect to -- or digging deeper into operational factors on Page 20, we can see that fuels volumes increased by 4.3%, which is quite a healthy increase, up from 1 quarter to -- on a year-on-year basis, so fourth quarter 2017 with respect to fourth quarter 2016. This is composed of a very strong 5.2% increase in gas stations coupled with a 3.2% increase in the volumes related to our industrial channel. With that, we have ended the year with a market share of 57.2%, which is slightly lower than the 58% or a little higher than the 58% that we recorded last year. It has to do basically with, as we had previously announced, with some mining clients that we lost in the first part of the year.
Going forward, we see commercial margins stable in Chile. A very competitive market, but also a very well-positioned network by Copec. That should lend stability to commercial margins. But we are also always subject to the influences of the FIFO effect and also to the influences of these import opportunities that we can go ahead with on a nonrecurring basis. Mapco is basically in line with expectations. EBITDA for Mapco ended up at approximately $40 million, which was in line with our budget. It has recorded a healthy 4% increase in volumes in a region where volumes were basically flat. Still a lot of work to do in Mapco but overall, we believe it's a good performance from being at its first year, which is basically a transition year.
In the case of Terpel, which is shown on Page 21, EBITDA, which is shown in Colombian pesos, EBITDA is down with respect to the fourth quarter 2016 from COP 158,000 million to COP 151,000 million. This has to do with the lower FIFO effect on one hand. Secondly, we have divested our Mexico division, the natural gas for vehicles Mexico division. We have sold it out and, therefore, we're not recording a contribution of EBITDA from that division anymore. But there's a decrease in the performance of our aviation division. So sales to airports are basically down during this quarter, which basically had to do with some strikes that took place during the quarter in Colombia.
And finally, 2 trends that have lately affected the performance of Terpel and that have continued for a couple of years already are, first of all, the reduction in natural gas for vehicles, which has happened as natural gas has gradually lost competitiveness to oil-related products. This has stabilized though in the last quarter. So we haven't seen a fall in the last quarter in relation to the immediately preceding quarter. But there's still a fall, a decrease in volumes with respect to the fourth quarter 2016. The other effect that has been going on for a while has to do with smuggling across the border with Venezuela, which also hurts our volumes at Terpel.
Moving on to our Abastible, which we are showing on Page 22. It has, in general, been a good year for Abastible. Even though the net income and the EBITDA ended up a little bit below what we recorded in the fourth quarter 2016. It has to do with some particular conditions that we met during this last quarter. But in general, it has been a very good year for LPG, particularly in Chile and Colombia. In terms of operating income, we are showing a decrease, we -- which basically has to do with a lower performance in Colombia. And this, in turn, is basically driven by distribution costs, which have gone up on the back of some new regulatory requirements. This is partially offset by better performance in terms of volumes, both in Chile and Colombia. As we will see in a while, volumes have been strong in both of those countries.
In the case of nonoperating income, we are recording -- this is where we're recording the impairment carried out at Sonamar, which is one of our fuels transportation-related companies. There's also a high base of comparison in the fourth quarter 2016. We recorded a onetime bad will effect related to the acquisition of Duragas in Ecuador, which of course we don't have anymore. This effect, we don't -- we are not repeating this effect in this quarter.
Digging further into the operational level on Page 23. We can see the growth in Chile of 4.8% from the fourth quarter 2016 to the fourth quarter 2017. This is composed of -- by a 1.7% increase in the industrial channel, in the bulk channel; together with a very strong 6.2% increase in the bottled channel in Chile. This growth, this very healthy growth that we have seen in Chile over the last 2 years or so has been the result of climatic conditions on one hand, which has favored the market as a whole, but also very successful commercial strategies carried out by Abastible, which have allowed it to gain some market share in Chile.
In Colombia, we have shown a 3.2% increase in physical sales, which is also quite strong. And we have ended up the year which -- with a total volume increase of more than 5%, which is very strong and has to do once again with successful commercial strategies. But also with increased availability of supply of LPG.
Some other conditions that are shaping this market are listed there under the outlook title. In Chile, we are seeing gas availability from Argentina, which in general brings down our cost of supply and, therefore, increases our margins. In Colombia, as I said, also increased gas availability and also commercial strategies that have rendered good results. In Peru, we have -- we had a challenge there. We have ended up the year with an EBITDA of around $22 million to $23 million, which is lower than we expected and, therefore, we are centering our efforts there in order to improve this EBITDA. This is a market that has been hurt by several exogenous factors. One of them has to do with climatic conditions at the beginning of the year, floods basically at the beginning of the year. The other condition of this market that we are seeing and which is a challenge in the short term, but also an opportunity in the long term, is the high degree of informality in the market. That provides for a space for well-established companies to grow in the future. But for the time being, it is a challenge to compete against those informal players. In the case of Ecuador, we are seeing good growth related to the fact that the gas consumption has gained strength and electrification plans carried out previously have lost some strength. But overall, a good year for Abastible.
In terms of our pipelining division, which is called Sonacol, which is shown on Page 24, we are recording an increase in net income and an increase in EBITDA, which basically stems from fuels volumes increasing by 8% during the year. This is a very stable subsidiary company, where operational income is basically linked to volumes transported.
In terms of our other investments, on Page 26, we're presenting the detail of our most important other investments. Igemar, which is our fishing division recorded a fourth quarter net income, which is a negative $52 million, $53 million net income. And this has to do basically with the impairment of fixed assets carried out by the subsidiary company, Orizon. Together with that, we had operating income, which has decreased and driven by lower fishmeal and fish oil prices.
Associated company, Corpesca, posted a less unfavorable results. So it's a loss but less pronounced in the fourth quarter 2016, where it had been affected by an impairment of fixed assets at that time. Laguna Blanca is parent company of -- for coal division, Mina Invierno and recorded a net income of $2.5 million. Finally, Metrogas and AGESA, these are 2 companies which resulted from the division of the previous Metrogas. Metrogas has shown an increase in the profit, a very stable operational performance where volumes have increased quite intrinsically. But margins have decreased a bit on the basis of increasing costs. In the case of AGESA, as we mentioned earlier, the base of comparison is very high because in the fourth quarter 2016, we recorded the sale of the 20% stake owned at GNL Q, which is the LNG terminal at Quintero that was sold back then, generating a very interesting profit.
That is basically it in terms of results. What follows is the most important developments that have taken place in the last part of the year. We're starting out by Terpel. Terpel just announced last Thursday that it has closed the acquisition of the ExxonMobil [ South American ] assets from ExxonMobil. We had announced and signed this agreement approximately 1 year ago. By the end -- actually by the end of 2016, it was subject to the approval of the authorities in the different countries where we would be acquiring assets. And after we got the final approval by the Colombian authorities, we were able to sign this deal.
What we have -- the total amount paid here was $714 million. This includes cash involved in transaction, companies coming with cash which amounts to $230 million, which gives us a net value paid of approximately $480 million. Let me remind you that these assets involve everything that is required for the operation of lubricants in Colombia, Peru and Ecuador of the ExxonMobil brand. This means a 30% market share in lubricants in Colombia, 30% in Peru and 9% approximately, all of these are approximate figures, in Ecuador. There are also some liquid fuel assets that are included in this package of assets. In Colombia, liquid fuels have -- amounts to approximately 25% market share. In Peru, we're acquiring the operation of the Lima airport, the international Lima airport, which means approximately 19% to 20% of the aviation segment in Peru. And in Ecuador, we're acquiring 6% of the market for fuels, which will be added up to be approximately 8% that Terpel has -- through the Terpel brand in Ecuador.
We have based this acquisition on very strong fundamentals. We think that the combination of the ExxonMobil brand, together with the distribution capabilities at Terpel, is very, very strong. We will be basically multiplying by 4x the volumes sold through Terpel in lubricants. And we are at this point in time initially estimating an incremental EBITDA of approximately $70 million for the operation that will remain under the Copec -- under the Copec and Terpel umbrella, excluding the assets that will be sold. So approximately $70 million in terms of incremental EBITDA.
Next steps are basically selling the fuels asset in Colombia, which was one of the conditions imposed by the Colombian regulatory authority and where we have a total time frame of 9 months to carry that through. This is being done through a totally independent trust that is handling the operations of ExxonMobil for the time being. That trust will be transferring the lubricant assets back to Terpel. And at the same time, we'll be handling the sale of the fuels assets in Colombia. So those are the steps to follow.
And finally regarding the financing so far. It has been financed by a bridge bank loans. And the exact financial structure, the long-term financial structure is still to be determined. And in part, it will depend on the final proceeds, which relate to the sale of our fuels assets in Colombia. So that's the news from Terpel, which we believe are very good news.
Moving on to Page 29. We are showing an operation carried out by Arauco in Brazil. Arauco -- in September 2017, Arauco announced that it had agreed to acquire Masisa do Brasil for a total transaction price of approximately $103 million. The final disbursement after adjustments amounted to approximately $58 million. The assets that we're acquiring consist basically of 2 panel mills, which add up to 800,000 cubic meters approximately and also includes 660,000 cubic meters of melamine capacity. The transaction was closed at the end of the year. And therefore, the assets of Masisa do Brasil are already consolidated in your balance sheet as of December 2017. This allows Arauco to go up to 2.3 million cubic meters in the Brazilian market and to consolidate its position as the second largest world player with a total capacity of 10 million cubic meters approximately.
Along the same lines, on Page 30, we -- in December 2017, we announced the -- that we had signed an agreement to acquire the assets of the subsidiaries of Masisa in Mexico. Total price agreed is approximately $245 million. The main assets consist of 3 industrial complexes with a total capacity in panels of approximately 740,000 cubic meters and some additional capacity in resins and other additional products. The final closing of this transaction is subject to the approval of the different authorities, with the most important one being the antitrust authorities in Mexico.
Regarding our Grayling Project in the U.S., let me just remind you that this is a 800,000 cubic meters project. This is a new mill that we're building, state of the art, very efficient. Total investment associated to this investment is $400 million approximately. And the progress made so far is approximately 70%, so 70% completion for the Grayling Project, which means that it is on schedule.
Progress made in our Dissolving Pulp Project in Valdivia is also on schedule. We are at 11%. Let me just remind you that this is -- we're converting our Valdivia line to dissolving pulp. Dissolving pulp is a kind of pulp that is basically used for the textile industries. In general, prices for dissolving pulp are higher and, therefore, margins are better than paper-grade pulp. On average, historical, they have been better than prices for paper-grade pulp. So we're converting this line, but at the same time, maintaining the option to go back to paper grade if needed. Total investment amounts to $185 million. We are expecting start-ups during late 2019. And as I said, we are at 11% completion.
And finally, on Page 33. We had basically seen the end of the forestry fire season in Chile and completed the season with losses that have been way below what we recorded in 2017. This has been a mix of exogenous conditions, basically climate conditions but also very important efforts carried out by Arauco's management in order to further optimize the prevention and management of forest fires.
Having said all that, we are opening up the floor for any questions you might have. Thank you for listening.
[Operator Instructions] The first question will come from Thiago Lofiego with Bradesco BBI.
Rodrigo, I have a question on MAPA. There's a -- after the consolidation between Fibria and Suzano, do you have -- their focus will be on deleveraging. So the possibility or the probability of them going on for an expansion in the next 18 months is very low. So there's a clear supply window open, and we know that you guys have the MAPA project. So I would just try to understand or ask you to give us a little bit more color on what the rationale is for the company not to go ahead with MAPA? Or if at some point in the near term, you might decide to go ahead? And then within the same question and also thinking about strategy, is Arauco looking at a further consolidation moves in Latin America? We know that there are other assets in Brazil for sale. So is it something that continues to be in the agenda? Or now, MAPA would be the first option to growing pulp. And then my second question is, on the Valdivia conversion. Just to understand, I mean, right now, I know you guys are going ahead with the conversion. But I mean, would it be a really -- a highly flexible mill, and you would be taking those decisions to produce dissolving or paper-grade pulp in a very flexible way? Or the idea would be to first convert to dissolving and then learn how to operate that asset and learn how to operate in that market, and then future -- in the future, maybe you would consider switching it back to paper grade? Just to understand the dynamics there.
Thank you, Thiago. Let me hand it over to Gianfranco, who will elaborate on this questions, which are specific to the forestry division. Thanks.
Well, first of all, regarding MAPA, you know that we are still looking for a date to present this to the board. I mean, we are preparing the information. We have to quote equipment again. Remember, that this project was originally approved environmentally in 2014. So it has been a long time and the situation, technology has changed. Exchange rates have changed. So we need to do more analysis to prepare the case for the board. So we plan to do that probably in the middle of the year, let's say June, July. And we've continued working on that. The case of Suzano and Fibria merging, of course, puts another variable on the table of the future greenfield investment that could be done in the period. I agree with you that probably the merge will put more leverage on those companies, and they will postpone probably some investment. So that is, I think, good news for the price environment that we could face in the future. But we need to analyze it more carefully, and we're working on the budget for the project and the technical aspects of the equipment and -- in order to bring the most important data to the board, which is the total CapEx and then -- and our projection of prices for the evaluation of the project. So we'll keep on track. We haven't changed our timing for presenting to the board. And of course, we will take into account the situation of the market and the competitors when we analyze the case. In terms of M&A, of course, we are always open to new acquisitions or operations in M&A. We're always analyzing our position. And of course, if we decide to go with MAPA, that it will put our leverage a little bit up. So that means that we will have to look more carefully at M&A activities. So this another thing to consider when deciding to go ahead with the MAPA project. Regarding the Valdivia conversion, yes, of course, there is now the prices of dissolving pulp and paper grade are more close because of the increase in the paper-grade price. But you have to look at the long-term pricing, and we think that this gap should return to the historical average. There's some, of course, some swing capacity that can move from paper grade to dissolving pulp. And that's, in this case, should be more pressured to go back to paper grade to use the better relative price, let's say, when taking into account the production that you lose when moving to dissolving pulp. I think we will have some time to finish our product or project until the end of '19. And then we'll start a ramp up and produce our product, and then we will decide if we need to switch back. But I think the probability of doing that is quite low because I think it will be more probable to have a more positive case for dissolving pulp rather than paper grade in our case.
The next, if I may, just one last question. Back last week in Shanghai, there was a lot of optimism regarding pulp, and I would say even more so for softwood given the supply disruptions that we saw in Scandinavia and also quite solid demand from pretty much every region. What's your view on the short-term trend for both softwood and hardwood? I mean, do you -- and I just have one final comment. We actually heard that there's potential for 2 or 3 additional price hikes on the softwood side. So my question is, do you see a scenario of price correction on hardwood in the short term considering that the scenario for softwood is actually quite positive? If you could give us some color on short-term trends, it would be great.
Yes, I mean, we agree that the scenario for pulp in general is very good. Demand is growing everywhere. And then, I guess, first time, we have all economies growing. The paper producers are able to pass the price increases. And it's funny but paper producers are happy with the high price of pulp because they have a way of convincing their clients to accept higher prices of paper. So I think that this momentum is good. I have the feeling that there probably -- the second semester will be better because you always have some summer slowdown in terms of demand. And I think that probably, prices will be stable in the short term, and we could have a possibility of another round of increases in the second semester of demand tightens again coming from the summer in the northern hemisphere. And of course, the rest of the year, next year and the following, there's the sense that there will be some scarcity of pulp because demand continues to grow at 1.5 million, 2 million tons a year. And we all know that there's no new projects ramping up, at least in the next 3 years. So we are quite positive for '19 and '20. And probably this year would be better than we thought initially.
And just to understand better, I mean, when we enter summer months in the northern hemisphere, would you then see a possibility of a price correction then? Or not really because of capacity shutdowns or whatever other factors?
No, I don't see right now reductions in prices. I feel that we can keep prices stable at least. And coming out of the summer season, probably, we can see some increases in prices. But we are in this market. It's very unpredictable. Right now, we are in a very positive mood, and I think that would -- should continue. So on purpose guide, I don't see any reductions in prices in the short term in both fibers.
[Operator Instructions] The next question comes from Marcio Farid with UBS.
I have a couple of follow-ups. Just trying to understand, what's your view on the mixed paper ban in China? And now if you think it's already affecting demand or it's an upside risk for the remaining of the year? Or really, it's -- you don't see it as an upside risk at this point in time? And also on the forestry side, just a follow-up on the sales volumes of both pulp and soft cedar. Can you just remind us what was -- what drove the strong reduction in soft sales volumes on a year-over-year and quarter-over-quarter basis as well?
Okay, Gianfranco?
Okay. yes. The case for -- one of the reasons why the demand is so tight for virgin fiber in China is the ban on unsorted wastepaper. I think that's already affecting the demand for pulp. We have seen numbers of very sharp declines in imports of wastepaper, especially unsorted wastepaper. And I think that's already there. I think that's affecting the demand for virgin fiber because they're replacing recycled paper. In terms of the change in volume, I think the biggest impacts of the fourth quarter compared to the third quarter at least is that in the fourth quarter, we had more normal maintenance stoppages in our mills that were programmed that way. And on top of that, we had a couple of events that disturbed the export, especially from Chile. One was the port strikes that we experienced in November, about 10 days that affected basically the lumber sales and fiber sales from Chile. And then we had a blockage in Constitución in Chile for about a month. That affected one pulp mill, the Constitución pulp mill, affecting about 35,000 tons; and one big sawmill that we have in the same region, that is the [ Biennales ] sawmill. So those 3 effects make the volumes of sales, especially coming from Chile, were much lower than the third quarter. Some of those volumes are going to be recuperated in the first quarter, especially the wood part but -- that was affected by the port strike. Unfortunately, the volume that was not produced in Constitución cannot be produced because they work at full capacity.
And just a follow-up. We saw some weak data coming out from China for January pulp demand. And I think that's probably the result of producers taking downtime ahead of the Chinese New Year, right? So there are other concerns of the market that was expecting demand to improve after the Chinese New Year. And so just wondering, are you seeing the demand improvement materializing yet? And what to expect in the very short term?
Yes, one of the factors that could affect the demand was the Chinese New Year, that was in February this year. And -- but we have seen a very good demand. I mean, our team just came from China, and they're seeing very strong demand, and clients looking for pulp. Even European producers going -- European paper producers going to China to look for fiber. So but we're still very optimistic about the demand. We don't see any weakness in the demand in China for pulp.
Ladies and gentlemen, this concludes the question-and-answer section. At this time, I would like to turn the floor back over to Mr. Rodrigo Huidobro for any closing remarks.
Okay, thank you very much for joining us today, and we expect to get back to you by mid-May to have a look at the first quarter results for 2019 (sic) [ 2018 ]. Thanks very much.
And thank you, sir. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.